Illinois ASBO 61st Annual Conference Risk Management 101 Presented at: Illinois ASBO 61st Annual Conference May 16, 2012 Presented by: Michael McHugh Area Executive Vice President Arthur J. Gallagher Risk Management Services, Inc. 1

Introductions 31+ Years Insurance and Brokerage Experience National Pooling Niche Principal National K-12 Principal-Arthur J. Gallagher Public Entity & Scholastic Division ASBO International Member Illinois ASBO Member for 25 years Experience working with over 575 districts on various risk & insurance topics 2

Objectives Define Risk Management Explore basic components of a typical Risk Management Program 3

Risk Management Defined Risk Management covers all the processes involved in identifying, assessing and judging risks, assigning ownership, taking actions to mitigate or anticipate them, and monitoring and reviewing progress. 4

Risk Management Defined Planning for the negative consequences of any decision process or action by using whatever means feasible to control the chance of financial loss. Public Sector Risk Management Manual The “Public Sector Risk Management Manual” is published by PRIMA and written by public sector risk managers. Note to Presenter: This is based upon a traditional and rather narrow definition of risk – which is focused upon potential loss. An expanded definition of risk, which includes the potential for loss or gain, is the definition used in “enterprise risk management”. 5

Risk Management Involves Trying to stop losses from happening (through avoidance, risk control, loss control or loss prevention) Paying for the losses that do occur (through reduction, insurance or risk transfer) This is an attempt to restate the definitions in non-technical language. The major concepts (listed in parentheses) are discussed in more detail throughout the rest of the presentation. 6

Risk Categories Strategic Risk – strategic objectives and political, economic and global market conditions Financial Risk – currencies, interest rates, credit and liquidity risks Operational Risk – risks related to systems, processes, technology and people Compliance Risk – regulatory and legal Reputational Risk – damage to “brand” Hazard Risk – property, liability, workers comp 7

Risks for Public Schools School Districts = “Institutions of Learning” Education of Students Athletics & Extracurricular Activities Employees & Volunteers Transportation Food Service/Cafeteria PTO/PTA/Booster Clubs Buildings/Contents including Materials and Mobile Equipment Playgrounds and Athletic Facilities Educational Foundations 8

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The Evolution of Risk Management 2008 Chief Risk Officer Enterprise Risk Management Consultancy Risk Financing Multi-Jurisdictional Integration Loss Control Claims/Litigation Management Cost Allocation Bus./Government Partnerships From PRIMA 1998 Risk Financing Cost Allocation Loss Control Contractual Risk Transfer Claims/Litigation Management Outcome Orientation & Benchmarking Integrated Disability Management 1988 Risk Financing Loss Control Organizational RM Focus Claims Management Regulatory Compliance Public Safety RM Employee Benefits 1978 Insurance Procurement Policy Administration 10

Risk Management Toolkit Avoid Sub-contract Exit Control People Plant Finance Fund Insurance Transfer Contract 11

Standard Public School Insurance Coverages 12

Insurance A contractual relationship that exists when one party (the insurer) for a consideration (premium) agrees to reimburse another party (the insured) for loss to a specified subject (the risk) caused by designated contingencies (hazards or perils). 13

Insurance Program Coverages Definition of Insured Needs to be broad so that it covers the following: District and its employees / student teachers Elected / appointed officials Sponsored / endorsed organizations Volunteers who do work at your direction on behalf of the District 14

Property Coverage Buildings Contents Inland Marine Valuable Papers EDP Equipment EDP Extra Expense EDP Media AV Equipment Valuable Papers Fine Arts Musical Instruments Builder’s Risk Needed for new construction and renovations at your district Extra Expense Increased Cost of Construction / Demolition Coverage Auto Physical Damage Electronic Data Processing Equipment, Data, and Software EDP Equipment and media/software includes all electronic property and equipment that is generated by a microprocessor or other memory device (please note that EDP definitions vary widely with insurance policies). In addition to the perils described above, other causes of loss commonly insured under an EDP form include: electrical damage, power surge, brown-out, short circuit and magnetic damage or erasure of EDP data and/or software, mechanical breakdown, change in temperature or humidity, computer virus and earthquake and flood. For example, coverage would apply if a software virus infected your information systems and destroyed all the data saved on the hard drives. 15

Crime Coverage Employee Dishonesty Loss of Money - inside / outside premises Depositor’s Forgery Bonds i.e. working cash / treasurer’s / life safety 16

Boiler and Machinery Coverage Fired / Unfired Pressure Vessels MEA coverage Refrigeration coverage Air Conditioning Units Extra Expense Water Damage Joint Loss Endorsement BOILER AND MACHINERY COVERAGE This form of insurance provides important mechanical breakdown coverage generally not available under any other insurance policy. A Boiler and Machinery policy can protect an insured against the effects of catastrophic property loss, such as steam boiler explosion or an expensive breakdown of machinery and equipment. But it's not just the physical damage caused by the explosion or breakdown that's of concern. While repairs are being made, valuable time and profits are lost. Business Interruption coverage protects against this. Often Extra Expense coverage is required to keep the business in operation regardless of cost. Consequential Damage and Refrigeration Interruption insurance protect against spoilage as the result of a breakdown. Many times these business interruption, extra expense and spoilage losses can be much more extensive than the damage to the equipment itself. Equally important is the very valuable inspection service that Boiler and Machinery insurance can provide. Not only does this service satisfy most jurisdictional inspection requirements, but it also can benefit the insured by providing sound loss control recommendations that can help assure efficient operation and longer equipment life. 17

Automobile Coverage Coverage for autos, trucks, bus fleet Auto Liability Auto Physical Damage Hired / Non-owned Coverage 18

General Liability Coverage Broad form General Liability coverage form, which includes: Bodily Injury / Property Damage Personal Injury and Contractual coverage Sexual Abuse / Misconduct coverage Athletic Participation coverage Limits usually $1M per occurrence / $3M aggregate Fire Damage (Legal Liability) $500K limit Employee Benefits Liability - $1M Claims-Made coverage 19

School Board Liability Coverage Make sure it covers: Employment Practices Liability – failure to employ/promote Discrimination Harassment Wrongful Termination / Discipline IDEA coverage Back Wages coverage Non-Monetary coverage Failure to grant tenure Retaliation (Including Lockouts) Wrongful demotion or negligent employee evaluation This is you, your boss, and your Board Get a broad definition of named insured Can be written on an “occurrence” basis or on a “Claims-Made” basis 20

Workers’ Compensation Medical Indemnity Statutory Employers Liability Other States Endorsement Voluntary Compensation Endorsement 21

Student Accident Program In case of no primary medical insurance, becomes primary medical insurance for injured student Provides option for 24-hour coverage to be purchased by parent/guardian Reduces General Liability Premiums Provides $5M of coverage for ALL students in the district for ALL school sponsored and school supervised activities Covers 100% of any out of pocket cost incurred by parent/guardian for medical expenses 22

Student Accident Insurance Benefits Reduces litigation against district Reduces administrative burden on district administration Good-Will gesture towards community Reduces claim costs Easy for parents to get reimbursed 23

Specialty Coverages Pollution Liability Foreign Liability Special Events Professional Liability Nurses Educational Foundations Fiduciary Liability – including 403(b) exposure 24

Educational Foundation Directors’ & Officers’ Liability Coverage Separate Board of Directors creates exposure Provides up to $5M for fiduciary liability arising out of funds managed by Foundation 25

Foreign Liability Program Covers liability arising from trips overseas Provides coverage in case of bodily injury or property damage to a third party while traveling abroad VERY INEXPENSIVE COVERAGE 26

Pros and Cons of Available Options First Dollar Insurance Program Safety Dividend Program Large Deductible Retro-Plan All Lines Aggregate Stop Loss Specific Excess Insurance Placements by Line Rent-a-Captive Captive or Risk Purchasing Group Pure Self-Insurance Less Control Less Risk Greater Control Greater Risk 27

Pros and Cons of Available Options Stand Alone / Individual District Purchase Cooperative Purchasing Pools Risk Retention Groups Captives STAND ALONE 100% control Bid on annual basis, if desired Dictate terms, to some extent 28

Pros and Cons of Available Options Cooperative Purchasing Mission Eligible Members Size Lines of Coverage Program Structure Financial Condition Accessibility Governing Body Know the Group’s Mindset!!! Align missions: Smarter Adults – Safer Children program 29

Cooperative Purchasing Loss Control Activities Vendor Capabilities and Resources Claim Settlement Policy Member Requirements Financial Contractual 30

Conclusion 31

Contact Information Michael McHugh - Area Executive Vice President Public Entity & Scholastic Division Arthur J. Gallagher Risk Management Services Direct: (630) 285-4373 Email: michael_mchugh@ajg.com 32

Questions? 33